One situation especially ripe for occurrence of an HSA error: when an employer's payroll system calculates the HSA contribution based on 24 payroll periods when the employee actually has 26.

The IRS recently published an information letter from 2015 that appears to allow fairly significant leeway in correcting mistaken health savings account (“HSA”) contributions. While the new guidance appears helpful upon first review, employers with HSAs should proceed with caution when considering correcting mistaken HSA contributions.

Previous IRS guidance

In 2009, as part of a larger IRS Notice on HSAs, the IRS issued limited guidance on mistaken HSA contributions. This guidance provided only two circumstances that allowed for the employer to ask the HSA custodian (the “bank” that is holding the money) to return the employer's contribution: the money was contributed on behalf of a completely non-HSA-eligible individual (for that entire plan year); or the employer's total HSA contributions exceeded the IRS-allowed HSA maximum amount for that plan year.

Related: 10 HSA questions employers & employees ask

Notwithstanding the above two situations, the notice said, “…[e]mployers generally cannot recoup amounts from an HSA….” Thereafter, employers were left to wonder what (if any) other situations were allowable to correct.

The IRS's current information letter

The recently published IRS information letter says that the 2009 IRS notice was not intended to be an exclusive correction-eligible list. As a result, the new IRS letter provides examples of situations where corrective action may be allowed. These situations are:

• The amount withheld and deposited in an employee's HSA for a pay period is larger than the amount shown on the employee's election. However, it is not clear how this works if the employee elected an annual amount. In that case, it appears the employer needs to wait until the end of the year to recoup the money.
• The employer makes an unintentional employer contribution because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other.
• The HSA contribution is incorrectly entered by a payroll administrator (whether in-house or third-party).
• The employee receives as a duplicate HSA contribution because duplicate payroll files are transmitted.
• A change in employee payroll elections is not processed timely so that amounts withheld and contributed are greater than (or less than) the employee elected. As a practical matter, however, it is unclear why the employer would need to request money back for amounts that were less than the employee's actual election. The employer should just make up the difference in future payroll contributions.
• The HSA contribution amount is calculated incorrectly, such as where an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods. This situation is especially “ripe” for occurrence when an employer's payroll system calculates the HSA contribution based on 24 payroll periods when the employee actually has 26. This could occur if the employer has different groups of employees who use different payroll periods and the system does not properly distinguish between groups of employees.
• An employee receives a greater-than-allowed employer contribution due to a misplaced decimal.

Potential traps for the unwary

While the newly published IRS letter is certainly welcome news, employers should beware of the following:

The letter is not actually official guidance from the IRS. The letter is not technically binding on the IRS. In other words, an individual IRS agent is not required to adhere to it when conducting an audit. The letter's non-binding status also means that the IRS can decide to change its mind regarding these (and other) HSA situations at any time. However, the situations listed in the new letter are fairly clear-cut mistakes. Given that fact, it seems like that an employer can take the corrective actions outlined in the letter; however, given the letter's non-binding status, employers should tread carefully.

Employers cannot compel the HSA custodian. HSAs are employees' individual accounts, as opposed to plans actually maintained by the employer. Therefore, the extent of the employer's ability to correct a mistaken contribution is to request the money back from the HSA custodian. Should the HSA custodian not want to refund the money for a given situation (because, for example, the letter's guidance is not binding – see previous), the employer cannot force the custodian to give the money back to it.

The employer has to provide proof. The newly released IRS letter states that employers need to keep “clear documentary evidence” proving the contribution was erroneous. The employer's “mere word” will not suffice. The letter thus emphasizes the importance of record-retention in this vein. This will likely be necessary to prove the mistake to the custodian and will be required to prove the mistake to the IRS, should the IRS ever audit this issue.

Therefore, while this new letter provides welcome news, employers should bear the above limitations in mind in relying on it. This is not to say that the newly listed HSA mistakes are not correctable; employers just need to recognize the limits of relying on information letters, like this one.

Additionally, while not expressly addressed in the letter, employers should also consider periodic reviews of their payroll processes to ensure that mistakes like the listed do not occur (or are caught timely if/when they do occur). These periodic reviews will help avoid, or minimize, the need to rely on this or any other guidance to correct these types of errors.

Michael Cramer, JD, is a compliance analyst for global insurance brokerage HUB International. He is responsible for ensuring that HUB's clients' ERISA Welfare Plans are in compliance with federal, state, and local laws and regulations. Mike advises HUB's producers and account managers (as well as HUB's client-liaisons) on these laws and regulations, and assists them in both ensuring that their current plan offerings are compliant, as well as developing strategies for their plan's future success.

Read more: 

• How well do business owners really understand HSAs?
• 8 health savings account headaches — and their solutions
• 3 retirement advantages HSA owners fail to use